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The shrinking deficit

Rochester Business Journal

May 17, 2013

It has been called the incredible shrinking deficit, and this week its projected size plunged again-to the smallest gap since 2008.

In a report released Tuesday, the Congressional Budget Office said the federal budget deficit for the year ending Sept. 30 will fall to $642 billion; that's roughly $200 million less than the CBO's February estimate. In each of the four previous years, the shortfall topped $1 trillion.

The CBO says the deficit this year, at 4 percent of gross domestic product, will be less than half the size of the 2009 shortfall, which was 10.1 percent of GDP. It projects the deficit shrinking to 2.1 percent of GDP by 2015.

How has this happened? Some credit-but not much-goes to the tax increases approved in December to avoid the fiscal cliff and to sequestration spending cuts. The bigger factors, the CBO reports, are higher-than-expected individual and corporate tax revenues due to an improving economy and an increase in dividend payments to the Treasury by Fannie Mae and Freddie Mac, which were bailed out by the government and now have returned to profitability.

After years of concern about rapidly growing federal budget gaps, the latest trend is welcome news. But concerns remain about the bigger picture. For example, some experts think the deficit might be shrinking too quickly-draining needed economic stimulus at a time when too many people remain unemployed.

And in the longer term, the federal deficit and debt outlook is much less bright. In the decade starting in 2014, the CBO cautions, "deficits in (our) baseline projections total $6.3 trillion. With such deficits, federal debt held by the public is projected to remain above 70 percent of GDP."

Indeed, under current laws, federal debt in 2023 will hit 74 percent of GDP and be on an upward trajectory. Among other risks, such debt levels leave the government vulnerable to much higher payments if interest rates rise.

Yet Washington observers already see a weakening resolve among lawmakers to work toward a long-term budget agreement. That's not surprising; too many elected officials respond only to an immediate crisis.

The improving deficit picture presents the opportunity to craft a well-thought-out plan for fiscal reform. It should not be wasted.